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What is Bank Guarantee

Bank Guarantee is normally required to secure Government Contracts.

Government gives contract for work only if business submits this Bank  Guarantee

This guarantee secures the Government that if Business fails to meet contract terms,Bank will pay Government the damages

 

 

 

Procedure for Bank Guarantee (Example)

  • Company wants Government Contract
  • Government puts condition on company to give Bank Guarantee of a fixed amount.
  • Now Company approaches Bank for issue of Bank Guarantee
  • Bank asks for FD of a fixed amount as security and charges commission to issue Bank Guarantee
  • Contract is completed
  • Bank Guarantee revoked
  • FD Returned including Interest on FD

 

Effect

Company pays commission and receives interest On FD

 

 

 

Assignment

Company wanted to apply for a Government Contract with Railway Mininstry

where company would sell goods to Government of Rs 100 lacs

To secure contract,Bank Guarantee of 40.00,000 was required.

Company took this  Bank Guarantee from PNB Bank of Rs 4000000 for 3 months

Bank took 2 % Commission p.a. and Asked for 25% Margin money in the form of a FD

Interest earned on FD was 8% p.a

Government Contract completed and money received from government 

Bank Guarantee revoked

FD Returned including Interest on FD

Pass Entries in books of company

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Davneet Singh

Davneet Singh is a graduate from Indian Institute of Technology, Kanpur. He has been teaching from the past 12 years. He provides courses for Maths and Science at Teachoo.